Over the past couple of days, Richard Fisher, President of the Federal Reserve Bank of Dallas, and Charles Plosser, President of the Federal Reserve Bank of Philadelphia, have made public comments about the state of the economy and about money policy. I think these are early indications of the Janet Yellen style of communication, which would seem to me to be considerably more blunt than her predecessor’s. The main points, as I see them:
1. weather aside, the US economy is now operating at very close to its maximum sustainable rate of somewhere in the 2.0% – 2.5% real annual growth range
2. money policy is too loose at the moment. Excess money is flowing into speculative financial activity, evidenced by unusually high prices for the most risky stocks and bonds. In other words, tapering will continue apace.
3. the Fed is focusing on the next step in removing emergency stimulus–that is, raising interest rates. That step is not as far in the future as financial markets appear to think
4. economic growth in the US is being held back by inappropriate fiscal policy. Congress and the administration have wasted the opportunity presented by five years of low interest rates to make obvious policy improvements, like revamping the tax code, that would make growth stronger. Washington’s behavior isn’t too different from what has been happening in the rest of the developed world.
5. withdrawal of unconventional monetary stimulus may have unforeseen negative consequences, since this is the first time QE has been done. The implication is, I think, that a little less dysfunction in Washington might help the process along.
In short, the Fed is in tightening mode. And, interestingly, it is trying to shift the spotlight onto the administration and Congress as the only possible source of further economic growth.